02129cam a22002297 4500001000600000003000500006005001700011008004100028100002300069245011200092260006600204490004100270500001500311520121300326530006101539538007201600538003601672710004201708830007601750856003701826856003601863w5684NBER20180217234921.0180217s1996 mau||||fs|||| 000 0 eng d1 aWoodford, Michael.10aControl of the Public Debth[electronic resource]:bA Requirement for Price Stability? /cMichael Woodford. aCambridge, Mass.bNational Bureau of Economic Researchc1996.1 aNBER working paper seriesvno. w5684 aJuly 1996.3 aThe paper considers the role of limits upon the permissible growth of public debt, like those stipulated in the Maastricht treaty, in making price stability possible. It is shown that a certain type of fiscal instability, namely variations in the present value of current and future primary government budgets, necessarily results in price level instability, in the sense that there exists no possible monetary policy that results in an equilibrium with stable prices. In the presence of sluggish price adjustment, the fiscal shocks disturb real output and real interest rates as well. On the other hand, shocks of this kind can be eliminated by a Maastricht-type limit on the value of the public debt. In the presence of the debt limit (and under assumptions of frictionless financial markets, etc.), Ricardian equivalence holds, and fiscal shocks have no effects upon real or nominal variables. Furthermore, an appropriate monetary policy rule can ensure price stability even in the face of other kinds of real shocks. Thus the debt limit serves as a precondition for the common central bank in a monetary union to be charged with responsibility for maintaining a stable value for the common currency. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w5684.4 uhttp://www.nber.org/papers/w568441uhttp://dx.doi.org/10.3386/w5684